Suntech Default Signals Chinese Solar Industry Consolidation

Suntech Power Holdings Co. (STP)’s notice
that it defaulted on $541 million of bonds brings China a step
closer to consolidating its solar industry, which includes four
of the top six panel makers.

The company, based in Wuxi, China, received a notice of
default from the trustee administering the convertible bonds,
which matured March 15, according to a statement yesterday.

Suntech’s default signals that the government and China
Development Bank Corp., which bankrolled the industry, is
reluctant to continue funding the solar industry’s expansion,
said Angelo Zino, an analyst with Standard & Poor’s Financial
Services LLC.

“It just doesn’t make sense for any type of support from
the government,” Zino said in an interview yesterday. “There’s
not going to be that white knight out there that saves
Suntech.”

The company’s American depositary receipts fell 8.4 percent
in New York trading to close at 64 cents.

China has supported solar companies through credit lines
from local government or state-backed agencies, prompting panel
makers to expand factories. Suntech more than doubled its annual
production capacity to 2,400 megawatts in 2011 from 2009,
according to data compiled by Bloomberg. That made it the
biggest solar manufacturer. Yingli Green Energy Holding Co.,
which may take that title based on 2012 results, almost tripled
its capacity to 1,700 megawatts during the same period.

That wrested control of the global solar industry away from
German and Japanese companies. The boom in capacity led to a
global glut and triggered a 23 percent decline in the price of
panels in the past year, according to Bloomberg New Energy
Finance.

Excess Capacity

Now, the government is seeking to pare excess manufacturing
capacity and reduce the dozens of companies making solar
products into a few companies that can survive.

China, forecast to become the largest solar-power market
this year, may abolish subsidies for some of the largest
projects and target aid for smaller ones, according to Meng Xiangan, vice chairman of the China Renewable Energy Society,
which acts as a conduit between government and industry in
Beijing.

For Suntech, which had more than $2.2 billion of debt at
the end of March 2011, the outlook for survival is bleak, said
Zino. The company hasn’t released earnings since then, after
announcing in July that it may have been the victim of fraud
involving 560 million euros ($725 million) of German bonds that
may have never existed.

Local Support

The company is talking with local government agencies in
Wuxi about financial support. It’s also negotiated a two-month
forbearance with 63 percent of its bondholders, who have agreed
not to exercise their rights until May 15.

Other bondholders haven’t agreed to the deal and are
preparing to file a lawsuit against the company, according to
James Millar, a partner at the law firm Wilmer Cutler Pickering
Hale & Dorr LLP in New York. He represents bondholders who own
more than 1 percent of the debt and expects more to join the
suit this week.

There is “nothing I’m aware of that will stop our
lawsuit,” he said in an interview. Suntech “may be forced to
file bankruptcy.”

The company is “likely” to file for bankruptcy after
defaulting on the debt, Aaron Chew, an analyst with Maxim Group
LLC in New York, said in a March 14 research note. “A nasty
fight could be in order.”

Credit Pledges

China’s government has a number of levers it can use to
restructure the industry because it’s been one of the main
lenders to solar companies. Suntech, Yingli, LDK Solar Co.,
Trina Solar Ltd. (TSL), Hanwha SolarOne Co. and JinkoSolar Holding Co.
were among 12 companies that obtained more than $43.2 billion in
credit pledges from China Development Bank, according to New
Energy Finance.

LDK, which received a bailout in July for part of its debt
from local authorities in Xinyu, where it’s based, said on Jan.
31 that it received approval for a 440 million yuan ($71
million) loan from China Development Bank.

Suntech is seeking “a way forward that will take into
account the rights and interests of all of its constituents,
including shareholders, noteholders, lenders, customers,
suppliers and employees,” Chief Executive Officer David King
said in the statement.